MSCI Considers the Case for More China A Share Inclusion | ETF Trends

MSCI, a major global index provider, is reported to be consulting with its clients about China A share inclusion in its indexes, a process that has been on hold since the last update in 2019.

China A shares are the domestic shares of Mainland China companies that trade in the renminbi on both the Shenzhen and Shanghai Stock Exchanges. It wasn’t until the early 2000s that approved foreign institutional investors were permitted to trade A shares in China through the Qualified Foreign Institutional Investor system, and as trading slowly expanded over the years, the Renminbi Qualified Foreign Institutional Investor (RQFII) program was introduced that provided daily liquidity for the first time.

Mainland A shares were included within MSCI emerging market indexes in 2018 and 2019 but only 20% of the potential A shares market was blended in before being put on hold due to A shares lacking certain characteristics for full inclusion. At the time, they lacked “same-day settlement (the day you buy a stock, you deliver cash), omnibus trading (trade A shares for multiple trading accounts), the lack of market holiday alignment between Hong Kong and Mainland China, and lack of an MSCI China A futures,” explained Brendan Ahern, CIO of KraneShares, on the China Last Night blog.

Last year the MSCI China A50 futures launched in Hong Kong, giving investors a way to take positions on A shares performance, hedge portfolios, and more via futures. Additionally, the Hong Kong Exchange announced in August of this year that it would be eliminating 13 non-trading days from its holiday schedule. Omnibus trading is also possible now with A shares.

The remaining hurdle is T+0 trading, or the ability to settle the same day a trade is made with cash.

“Yes, T+0 trading is a big issue, especially for passive investors. The reason is that on index rebalance day, you need to deliver cash on the trade date for Chinese A shares, but you do not receive the cash from selling non-Chinese stocks for two days,” explained Ahern.

“These are truly the only remaining issues preventing MSCI from moving forward with inclusion, but political considerations may also be delaying further inclusion announcements,” Ahern wrote, with the assurance that KraneShares will be watching closely for any developments from MSCI’s review.

Investing in A Shares With KBA

For investors that are looking for exposure broadly to China’s sectors, investing in A shares offers an opportunity. The KraneShares Bosera MSCI China A Share ETF (KBA) invests in Chinese A shares across multiple sectors — specifically those from the MSCI China A 50 Connect Index.

This fund seeks to capture 50 large-cap companies that have the most liquidity and are listed on the Stock Connect while also offering risk management through the futures contracts for eligible A shares listed on the Stock Connect. The index utilizes a balanced sector weight methodology to give exposure to the breadth of the Chinese economy.

KBA carries an expense ratio of 0.56% with fee waivers that expire on August 1, 2023.

For more news, information, and strategy, visit the China Insights Channel.